J.J. <accjiang@gmail.com>:
If you had no explanatory variables other than dummies for each panel
(the dummy variable form of fixed effects) the standard errors when
clustering by panel would be zero, roughly (i.e. close to zero, by the
standards of machine precision). Your 300 dummy variables may have a
similar problem as the 500 dummies implied by the FE, and it seems
likely you do not have the effective df you need to test 300 coefs.
Note -xtcltest- will tell you clustering is a problem here, since it
is essentially comparing the cluster-robust SE (about zero) to the OIM
SE (not zero) and saying they are different. While clustering may
well be a problem, you likely do not have the sample size (in number
of clusters, now) to effectively use the cluster-robust SE
calculations. You may want to explore a parametric approach like
-xtregar- or -xtgee- or explore one of the options in -xtivreg2- (see
the help file for -ivreg2- or the related papers for some detail on SE
options) from SSC.
On Mon, Mar 10, 2008 at 3:27 PM, J.J. <accjiang@gmail.com> wrote:
> Dear Statalisters,
>
> My question is related to Daniel Simon's question in this unanswered
> post: http://www.stata.com/statalist/archive/2006-03/msg00024.html. I
> estimate a linear fixed effect model (about 3000 observations and 500
> groups) with around 300 dummy variables. With the cluster option, the
> F-statistics of testing the joint significance of these dummy
> variables becomes HUGE (100,000+) even many of these coefficients are
> dropped in the test. When I just use the robust instead of the cluster
> option, the Wald test produces reasonable F-statistics. My main
> purpose is to test the joint significance of these dummy variables in
> the fixed effect model, should I drop the cluster option?
>
> Given the suggestions by Johannes Schmieder, Mark Schaffer and Austin
> Nichols in this post
> (http://www.mata.dk/statalist/archive/2006-09/msg00782.html), I felt
> it is absolutely necessary to use the cluster option with xtreg, fe.
> However, Mark Schaffer and Austin Nichols
> (http://repec.org/usug2007/crse.pdf) allude to the danger of testing
> multiple coefficients after the cluster option. In their simulation,
> the rejection rate increases to 1 as the number of coefficients
> increases. I guess their results indicate that the Wald test in my
> situation (cluster option and so many variables in the model) is not
> valid. What should I do? Any suggestions will be highly appreciated.
>
> One solution is to test if I need the cluster option using the not yet
> available xtcltest (Mark and Austion, when is this program
> available?). If I do need the cluster option, the next option is to
> get rid of some of the dummy variables.
>
> J. J.
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